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What you need to know
- Michigan Consumer Sentiment Index dropped in January due to higher inflation expectations and a deterioration of the economy outlook.
- Both short-term and long-term inflation expectations were at their highest levels in years, which could add to the Federal Reserve's concerns about price increases.
- According to economists, consumers may be driving up prices by buying in order to keep ahead of inflation.
Consumers are starting to feel more anxious about the price hikes.
According to the preliminary January survey, the Michigan Consumer Sentiment Index showed that inflation expectations had risen. Federal Reserve officials pay close attention to what consumers say about inflation because it can put upward pressure on both prices and wages.
The overall index dropped marginally, to 73.2. The Wall Street Journal, Dow Jones Newswire and other economists polled by the publication expected that December’s reading of 74.0 would remain unchanged.
The expectation of rising inflation has risen.
Consumers now expect inflation to reach 3,3% in the coming year, up from the 2,8% recorded in December. This is the highest reading since May. Consumers' long-run expectations for inflation spiked to their highest levels since 2008.
“For both the short and long run, inflation expectations rose across multiple demographic groups, with particularly strong increases among lower-income consumers and Independents,” Joanne Hsu is the director of University of Michigan Surveys of Consumers.
The rise in inflation could be halted by tariff concerns
Tariffs are seen as the major factor behind inflation expectations. In a Michigan survey, nearly a third of respondents mentioned them.
Donald Trump’s economic agenda includes tariffs. He proposed raising import taxes on China, Canada, Mexico, and other nations, a move that some economists think would raise prices.
Wells Fargo’s economists Tim Quinlan Shannon Grein and Jeremiah Kohl have noted that consumers also seem to think this way. According to the trio, people are rushing to purchase products before tariff policies take effect to avoid having to pay higher prices.
This is not good news for inflation. Especially since the progress in stabilizing prices seems to have stalled. As of November, the annual inflation rate has decreased from 9.1% in 2022 to 2.7%. It is still well above Federal Reserve target of 2%.
“The thought here is that buying-in-advance to avoid future price increases actually creates more demand, which in turn stokes the fire of inflation,” The Wells Fargo Report noted. “This ‘buy it before the price goes up’ mindset is detrimental to the gradual progress that has been achieved in bringing prices down.”
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